Open to Exploitation:

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1 Open to Exploitation: American Shoppers Online and Offline Joseph Turow, Lauren Feldman, & Kimberly Meltzer A Report from the Annenberg Public Policy Center of the University of Pennsylvania

2 Joseph Turow is Robert Lewis Shayon Professor of Communication at the University of Pennsylvania s Annenberg School for Communication. His published work includes more than sixty articles and nine books on the mass media, including Niche Envy: Database Marketing and American Life (MIT Press, forthcoming), The Wired Homestead (MIT Press, 2003, edited with Andrea Kavanaugh); and Breaking Up America: Advertising and the New Media World (University of Chicago Press, 1997; Chinese edition, 2004). He currently serves on the editorial boards of Journal of Broadcasting and Electronic Media, New Media and Society, Journalism, and Poetics. Lauren Feldman and Kimberly Meltzer are both Ph.D. candidates at the University of Pennsylvania s Annenberg School for Communication.

3 Open to Exploitation: American Shoppers Online and Offline By Joseph Turow, Lauren Feldman, and Kimberly Meltzer June 2005

4 Open to Exploitation: American Shoppers Online and Offline Overview.3 Background..6 The Study and the Population...13 Lacking the Knowledge.17 Concerns and Objections...21 Linking Attitudes and Backgrounds to Knowledge...27 Concluding Remarks

5 OVERVIEW Most Americans who use the Internet have little idea how vulnerable they are to abuse by online and offline marketers and how the information they provide can be used to exploit them. That is one conclusion from this unprecedented national phone survey conducted by the Annenberg Public Policy Center. The study indicates that many adults who use the internet believe incorrectly that laws prevent online and offline stores from selling their personal information. They also incorrectly believe that stores cannot charge them different prices based on what they know about them. Most other internet-using adults admit that they simply don t know whether or not laws protect them. The survey further reveals that the majority of adults who use the internet do not know where to turn for help if their personal information is used illegally online or offline. The study s findings suggest a complex mix of ignorance and knowledge, fear and bravado, realism and idealism that leaves most internet-using adult American shoppers open to financial exploitation by retailers. Americans lack of knowledge about marketplace rules puts them at risk. We found that: 68% of American adults who have used the internet in the past month believe incorrectly that a site such as Expedia or Orbitz that compares prices on different airlines must include the lowest airline prices. 49% could not detect illegal phishing the activity where crooks posing as banks send s to consumers that ask them to click on a link wanting them to verify their account. 66% could not correctly name even one of the three U.S. credit reporting agencies (Equifax, Experian, and TransUnion) that could keep them aware of their credit worthiness and whether someone is stealing their identity. Consumers are also vulnerable to subtle forms of exploitation online and offline. 64% of American adults who have used the internet recently do not know it is legal for an online store to charge different people different prices at the same time of day. 71% don t know it is legal for an offline store to do that. 72% do not know that charities are allowed to sell their names to other charities even without permission. 64% do not know that a supermarket is allowed to sell other companies information about what they buy. 75% do not know the correct response false to the statement, When a website has a privacy policy, it means the site will not share my information with other websites and companies. This lack of knowledge signals that the great majority of U.S. adults who use the internet is unprepared to deal with two hot trends that are rapidly becoming facts of life in stores, 3

6 yet have hardly received attention beyond the trade press. One trend, which marketers call behavioral targeting, involves buying or collecting information about a customer s activities in order to know how to best sell to him or her. The second development is price discrimination: when a seller charges different prices to different customers based on data the seller has about them. We asked a nationally representative sample of 1,500 adults who used the internet during the past month 17 true-false questions about key aspects of these new developments and where they can turn for help if their personal information is used illegally. Among them were the statements noted on page 3 as examples of Americans lack of knowledge. In fact, we found that the respondents know correct answers to an average of only 7 of the 17 of the true-false questions. We also found that they overwhelmingly object to most forms of behavioral targeting and all forms of price discrimination as ethically wrong. 76% agree that it would bother me to learn that other people pay less than I do for the same products. 64% agree that it would bother me to learn that other people get better discount coupons than I do for the same products. 66% disagree that it s OK with me if the supermarket I shop at keeps detailed records of my buying behavior. 87% disagree that it s OK if an online store I use charges people different prices for the same products during the same hour. 72% disagree that if a store I shop at frequently charges me lower prices than it charges other people because it wants to keep me as a custmer more than it wants to keep them, that s OK. Most internet-using U.S. adults are aware that companies can follow their behavior online. Almost all (89%) of those who say their supermarkets offer frequent shopper cards applied for them and in doing it gave the stores personally identifiable information about themselves. In this retail environment where companies collect personal information, Americans do directly admit feeling vulnerable. Only 17% agree with the statement that what companies know about me won t hurt me (81% disagree), 70% disagree that privacy policies are easy to understand, and 79% agree that I am nervous about websites having information about me. Sadly, though, only about one out of three (35%) says he or she trust(s) the U.S. government to protect consumers from marketers who misuse their information. In the face of all this nervousness and seeming confusion, it is startling that 65% of internet-using adult Americans nevertheless say they know what I have to do to protect myself from being taken advantage of by sellers on the web. Judging by their scores on the true-false test, they have a misplaced sense of confidence. People who say they know how to protect themselves score just as poorly on the questions and even the ones specifically regarding the online marketplace as the people who don t think they know how to protect themselves. By contrast, those with a higher education tended to be more modest about knowing how to protect themselves but were more likely to score better on the test. 4

7 In fact, of all characteristics in people s backgrounds, having more years of education is the best predictor of understanding basic realities about power to control information on them and the prices they pay when shopping online and offline. Yet even having more general schooling doesn t necessarily mean really knowing this world well. People whose formal education ended with a high school diploma know correct answers to an average of 6.1 items out of a possible 17. People with a college degree do better 8.1 but that still means they get only 45% right. Even people with graduate school or more average 8.9 correct just 51% correct. As U.S. society moves further into the twenty-first century, prices that vary based on firms information about us could become an increasing feature of the marketplace. Database-driven price distinctions could spread as growing numbers of retailers use information consumers never knew they revealed to draw detailed conclusions about their buying patterns that they would not have wanted. Consumers who are not aware of how behavioral targeting and price discrimination work, of what rights they hold when it comes to companies using knowledge about them, and of how to respond to these circumstances may not know they are not getting the best deals. They may consistently be paying more than others for the same products. At the end of the report we therefore suggest three courses of action. First, the Federal Trade Commission should require websites to drop the label Privacy Policy and replace it with Using Your Information. The new designation will likely go far toward reversing the broad public misconception that the mere presence of a privacy policy automatically means the firm will not share the person s information with other websites and companies. Second, U.S. school systems from elementary through high school must develop curricula that tightly integrate consumer education and media literacy. Paying new attention to these much-neglected subjects is critical if society is to succeed in preparing young people for the increasingly challenging twenty-first century marketplace. Third, the government should require retailers to disclose specifically what data they have collected about individual customers as well as when and how they use those data to influence interactions with them. The survey found that Americans are begging for openness in their relationships with marketers. Our examination of internet-using American adults in the new online/offline marketplace was carried out by ICR/International Communication Research for the Annenberg Public Policy Center of the University of Pennsylvania. The study was conducted by telephone from February 8 to March 14, 2005, among a nationally representative sample of 1,500 respondents who said they had used the internet within the past thirty days. Our aim was to address two critical public policy questions that have not previously been explored: How much do Americans know about who is allowed to control information about them when they shop online and offline? And what do they know and feel about those two rather secretive activities, behavioral targeting and price discrimination, that are increasingly affecting American shoppers on- and offline? 5

8 BACKGROUND These questions are important because it is becoming clear that shopping in the twentyfirst century will be quite different from the way it was in the twentieth. One does not have to turn to the movie Minority Report for an idea of futuristic gizmos consumers will confront in local malls. Activities are already underway across the retailing spectrum in banks, high-end boutiques, supermarkets, and discounters that are fundamentally altering the relationship Americans have with stores. Two particular developments stand out: behavioral targeting and price discrimination. Behavioral targeting in a retail environment takes place when a firm keeps track of a customer s shopping history in order to know how to best sell to him or her. 1 Price discrimination comes in a variety of forms, economists note. 2 The ones that most attract retailers involves using information to change prices based on what the seller knows about individual consumers or consumer segments. 3 Retailers consider behavioral targeting and price discrimination crucial tools to cope with the hypercompetitive online and offline circumstances in which they find themselves. Critics of the trend worry that it may well put many consumers at financial and even social disadvantage unless they understand what is happening. This study explores whether they do. The term behavioral targeting is often associated with the virtual world but the activity it describes takes place offline as well. 4 Online stores can closely follow movements of visitors for example, to see what products they viewed and whether they started to buy something but didn t complete the purchase. Stores can save the records of these actions and, by placing text files called cookies in the visitors computers, maintain a collection of what the people who use that computer have looked at on the site over time. Of course, following activities on a computer does not reveal whether they reflect the clicks of more than one person several members of a household, for example. Stores do keep records of the online purchases of individuals, and they try to encourage their customers to identify themselves when they visit their sites by signing in with a password. Getting the password typically means registering providing name and address in addition to other information such as gender, birthdate, and zip code. 5 The consumer s reward for offering personally identifiable information and signing in is the opportunity to receive quick checkout, special offers and attention via . The store gains a gold mine of information. Each time registered visitors enter the online stores using their passwords, stores can add information about their specific activities to a database. That allows the store s data analysts to categorize the consumer in terms of preferences and long-term value. Based on sales and tracking information, the merchant can also decide whether it is useful to buy additional information about those customers from data brokers. Over the 6

9 past few decades, the sale and purchase of information on individuals has become big business. Recent news reports about the theft or accidental loss of personally identifiable information by data brokers Choicepoint 6 and Lexis Nexis Group 7 shined an unusual public beacon on an industry that is aided by the absence of U.S. laws to control much of the extraction, manipulation and sharing of data about people and what they do online or offline. Without customer permission, organizations not affiliated with each other are prohibited from sharing certain personal health information, certain types of personal financial information held by certain types of firms, certain information that video stores and cable systems collect about their customers viewing, and personally identifiable information from children younger than thirteen years. 8 Generally, though, companies have virtually free reign to use data in the U.S. for business purposes without their customers knowledge or consent. Merchants can therefore easily buy information on valued customers backgrounds and activities with an eye toward better understanding their interests and purchasing power. A retailer will often hire behavioral-targeting firms to bring together for analysis all the data the retailer is collecting about customers. The firms create profiles of the individuals, often placing them into labeled segments of consumers with similar buying characteristics. Then, based on rules for data handling that include scoring individuals on various characteristics, the firms customize interactions with customers and the customer segment in ways intended to be the most profitable possible. The behavioral targeting firm Epiphany, for example, claims that it offers a complete solution for optimizing interactions with customers over online channels such as the Web, , and SMS [i.e., short text messages on cell phones]. In a case study on its website, Epiphany claims that by using its expertise and software, American Airlines has gained a comprehensive view of its customers across all [electronic communication] touchpoints... to enhance customer relationships. 9 For the American Airlines website, AA.com, Epiphany implements personalization and content management software to analyze customer profiles as customers move through the site and then proceeds to match them to relevant content and offers on the site. 10 Epiphany does that with an electronic newsletter sent to millions of customers. Called AAirmail, the publication provides customized content and offers tailored to the individual profiles Epiphany has created. As an example, newsletter articles vary to help individual customers reach their next top-tier status Gold, Platinum or Executive Platinum. 11 As an American Airlines marketing executive describes them, these activities are part of a larger unified view of customer behavior that allows the company to integrate data about past transactions and interactions, online or otherwise. 12 Increasing numbers of merchants are going beyond the digital realm and using Epiphany or larger database firms such as Oracle-PeopleSoft, or Acxiom to create central customer databanks for the instantaneous use of all customer information. As one writer put it, the repositories collect data from all points and then tailor permission-based offerings to accommodate customers finely segmented demands, wherever they originate. 13 7

10 In tune with this idea, retailers increasingly act as if their selling arena has merged into one integrated online/offline marketplace. Consumers, they believe, are multichannel they shop both online and offline. 14 Acxiom tells its clients that The ability to best serve your customers when it matters most during the interaction is critical to achieving customer growth and retention goals. Acxiom s customer recognition solutions enable companies to distinguish customers accurately and consistently, providing complete and instant access to relevant customer data across all channels of communication. 15 Growing numbers of merchants are therefore merging the data they have about their customers from the web, the phone, and the store floor in a bid to give their desired customers a seamless experience. In the process, behavioral targeting is taking place offline, online and across both areas. The offline activity has actually been going on for quite a while. As early as the 1980s, financial and leisure firms as well as elite retailers were following the logic of developing relationships with customers based on digital repositories and then treating them differently based on what they learned. They created the databases by soliciting information from their customers, buying information about their lifestyles from data brokers, and tracking their interactions with them. Mid-priced department stores and supermarket chains took longer to adopt this strategy. By 2000, though, that was changing rather quickly. A major reason had to do with the enormous price competition that they confronted in discount retailer Wal-Mart. Wal- Mart uses an aggressive everyday low prices strategy supported by a legendary efficiency, strong pressure on suppliers, and a huge investment in databases to track the movement and sale of products. The approach often determines the price of products in an area and consequently frightens retailers that sell the same or similar items. The phenomenon is so pervasive and powerful that it has become a noun Wal-Martization in the Forrester Research consultancy s lexicon. 16 In the absence of an ability to compete on price with Wal-Mart and similar discounters, many retailers have been searching for the best strategies with which to survive. Some consultants suggest that the answer lies in adapting to the varied needs of the area better than Wal-Mart can in terms of the right quality, convenient locations, and variety of offerings. Another stream of analysis sees Wal-Mart s long-term Achilles heel in terms of its difficulty in getting close to the individual customer or small-customer niches. This view emphasizes that with the exception of its Sam s Club wholesale setup, the company does not keep track of individual customer purchases or reach out to them in unique ways. Increasingly, retailers see a key competitive advantage in the Wal-Mart age as knowing and rewarding profitable customers better than Wal-Mart or any other competitors. The goal is to sell products that those consumers will perceive as valuable not primarily because of the price but because the product quality and service consistently matches what they need. Analytics firms with the expertise of finding patterns in purchase data develop profiles of best or at least good customers so as to focus on wooing them. 8

11 The idea is that as important as prospecting for new customers is, retailers should pay more attention to the good customers they already have. One reason is the belief that a high percentage (sometimes 80%) of a company s profit comes from a small percentage (often around 20%) of repeat purchasers and that it costs several times more to get a new customer as it does to retain a loyal one. Another belief is that the best new customers will be those who are similar to the best old ones. The more the retailer uses databases to find out about its desirable clientele, then, the better it can keep them, find others like them, and not pursue low-value consumers who tend to shop only for bargains or who return too many goods. So, for example: The Claritas company s P$ycle database helps banks figure out whom to keep and pursue as customers by statistically linking their customer to what Claritas knows about the background and behavior of types segments of people it concludes are like them. When fed a bank s customer data, P$ycle software segments them by evaluating the economic and demographic factors that have the greatest effect on their financial behavior. The 8 major groups into which P$ycle divides the population reflects a slide from high prosperity to virtual penury: Wealth Market, Upscale Retired, Upper Affluent, Lower Affluent, Mass Market, Midscale Retired, Lower Market, and Downscale Retired. The trick with all the groups and segments, according to Claritas, is to link the data to the bank s house file to create actionable information for example, whether or not to invite certain people as customers and, if so, what packet of materials to send. 17 According to Direct magazine, the Bloomingdales department store, which keeps transaction records of all its customers, uses database software called Klondike to focus on the store's 15,000 most valuable patrons. It contains their transactions, the history of promotional materials sent to them, and basic household information. Klondike presents the data about these people to Bloomingdale s telephone call center and sales floor personnel. By swiping the best customer s credit card at a point of service terminal a cash register salespeople can get an overview of the shopping interests of individual customers. The idea is to enable salespeople to custom-build merchandise suggestions. 18 In 2005 the CEO of data-mining firm IRI noted that for years, food and drug retailers have been compiling data from frequent-shopper cards but doing little with it. That, he said, was starting to change quickly. IRI signed a deal with a major grocery chain to mine shopper data to help it target marketing toward the most profitable customers. He expected more supermarkets to do the same. 19 A columnist in Progressive Grocer magazine noted that a small but growing number of chains are pursuing strategies that both invite very good customers and push away cherry pickers. He opined that behavioral targeting creating a profile of their customers and then performing triage on the market to save their most valuable purchasers is a wise competitive stance in a Wal-Mart world, where competing on price is out of the question. 20 9

12 Price discrimination is a logical corollary to behavioral targeting. Economists commonly identify three types of bias. First-degree price discrimination occurs when a different charge is tailored to a specific buyer based on what the seller knows about the customer. With the second-degree type, sellers openly offer a variety of fee options for example, grocery discounts for buying large quantities or lowered bank fees for keeping large account balances to induce consumers to choose the one that matches their interests or abilities to pay. In third-degree price discrimination, the seller decides what segments of the market have different levels of price sensitivity and charges the groups accordingly. Examples of third degree price discrimination are senior-citizen and student discounts. But while retailers grant senior citizen and student discounts openly, in a growing number of circumstances they are categorizing consumers into statistical segments without their knowledge. People in certain niches may then get different discount offers for the same products and services as well as for different products and services compared to those in other niches. For example, banks that use the Claritas P$ycle system vary the deals they present customers based on the lifestyle segments into which they slot them. Many financial institutions also carry out first-degree price discrimination without notifying their customers. They do it by scoring them based on their financial abilities and payment activities in the marketplace. Department stores and even supermarkets have been moving swiftly into this area, as well, though they don t discuss it publicly. With Bloomingdale s Klondike, for example, aggregate spending information atop each customer's file allows the floor rep to make snap decisions about offering special services that increase the value of that person s purchases compared to other customers. 21 On the flip side, stores have been trying to find ways to discourage shopping from what some retailers call bottom feeders consumers who visit them mostly for bargains and return products too often. 22 As for supermarkets, the frequent-shopper or loyalty card (held by far more than 50% of U.S. households) is currently their central way for keeping track of individual household purchases and charging them differently. One common supermarket pricediscrimination tactic involves the Catalina database system that gives different value coupons based on analyses of consumer s purchases using the store s loyalty card for 104 weeks. 23 Tests of in-store computer tracking technologies by Albertsons and Stop and Shop aim to customize the consumer s discounts based on shopping history from the moment the consumer enters the store. In both cases being a loyal customer doesn t automatically mean getting the lowest prices. Computer analyses of shopping histories might determine that a person s allegiance to some products means that he or she would buy them even without the discounts, or with smaller discounts than others might get for the same items at the same time. Merchants consider the online environment a particularly ripe area for such dynamic pricing that is, for first-degree price discrimination driven by behavioral targeting. Writing in Harvard Business Review, associates from McKinsey & Company chided online companies that they are missing out on a big opportunity if they are not tracking customers behavior and adjusting prices accordingly. 24 Consultants urge retailers to 10

13 tread carefully, though, so as not to alienate customers. 25 The most public revelation of price discrimination online centered on customer anger at Amazon.com in September 2000 when it offered the same DVDs to different customers at discounts of 30%, 35%, or 40% off the manufacturer s suggested retail price. Amazon insisted that its discounts were part of a random price test and not based on customer profiling. After weeks of customer criticism, the firm offered to refund the difference to buyers who had paid the higher prices. 26 Though website executives are wary of discussing the subject, it seems clear the practice continues. Consumer Union s Webwatch project found many bewildering and seemingly idiosyncratic price differences, sometimes quite large, in its investigation of airline offers on travel sites. 27 When asked whether travel websites vary prices based on what they know about customers previous activities, one industry executive told Webwatch advisor and University of Utah professor Rob Mayer, I won t say it doesn t happen. 28 All this, it should be noted, is usually quite within the law. In the Virginia Journal of Law and Technology, Robert Weiss and Ajay Mehrotra conclude that as long as the price differences are based on reasonable business practices such as rewarding loyal customers and do not discriminate against race, gender, or other impermissible categories, dynamic pricing appears to be legal. 29 Some economists argue, in fact, that certain types of price discrimination may in certain circumstances promote an efficient use of society s resources. The classic case is that of the dedicated, but by no means rich, country doctor who charges rich people more than poor people so that he can continue to serve both and make a reasonable living. More relevant to the current discussion, supporters of price discrimination that is tied to behavioral targeting and other types of personal profiling argue that is part of a larger process through which companies get to know and serve individual customers in ways that benefit both sides. Consumer advocates dispute this claim. They argue that while database-guided price discrimination might well help some businesses, it is considerably harmful to individuals and society. Of particular concern to critics are issues of privacy, reduced personal autonomy, misuse of data, and financial harm. Price discrimination based on profiling, they say, invariably means using information about individuals in ways that do not involve their permission. Further, retailers do not tell customers what information they have about them, so that price-discrimination decisions based on errors are quite possible. But even if the private information is correct, there still is the ethical issue of not allowing customers a say in the profiles stores create about them or the niches in which stores place them. Writing about behavioral price discrimination in the financial industry, Janet Gertz states in the San Diego Law Review that many characterize the commercial exploitation of consumer transaction data as a classic example of a market failure. She explains that statistics indicate that the power shift facilitated by predictive profiling has proven highly profitable for the financial services industry. However, there is little evidence that indicates that any of these profits or cost savings are being passed on to consumers

14 Chris Hoofnagle of the Electronic Privacy Information Center suggests that the same argument can be made regarding retailers in general. He notes that the Wall Street Journal found that frequent shopper cards do not generally save consumers money. He implies that giving stores the opportunity to vary discounts by what they know customers have paid in the past might increase this imbalance even more, especially for certain consumers. Hoofnagle also suggests that stores are acting unethically when they try to push customers away because data show they are frugal or sharp shoppers. At the very least, they are disallowing what many consumers have been taught throughout their lives by schools, parents, and ads that exhort them to follow storewide sales. From this perspective, database-driven price discrimination is against the American Way at least as it was practiced in the twentieth century. 31 The arrival of behavioral targeting and price discrimination in a severely competitive offline/online marketplace indicates that the U.S. is entering a new Way. Retailers in the twenty-first century are basing their relationships with consumers on fundamentally new assumptions and technologies. Underlying these changes are crucial issues of social fairness and marketplace transparency. A few experimental studies have shown that when researchers confront consumers with situations featuring price discrimination, the consumers reduce their trust in the retailers doing the discriminating. 32 Until now, however, no one has asked what consumers would say if retailers justified price discrimination to consumers with arguments that sometimes they may benefit from it. In fact, until now no one has explored what the U.S. public knows and thinks about these activities that promise to be key parts of twenty-first century marketing. How much do Americans know about who is allowed to control behavioral and other personal information about them in the online/offline marketplace? Are consumers aware of the existence of price discrimination based on behavioral targeting and other profiling? If they are aware of it, do they accept it as part of economic life, do they resent it, or do they simply believe that the government places limits on it in the interest of fairness? 12

15 THE STUDY AND THE POPULATION Because our questions relate to both the online and offline marketplace, we decided to focus on U.S. adults who use the internet. We cast our net broadly. We included people 18 years or older in our study if they said yes to the question, Have you used the internet in the past month at home, work, or anywhere else? Our questions aimed to focus on two areas. One was people s knowledge of the law when it comes to a company s right to collect information about them online or offline and to charge them and others different prices for the same items at the same time. The second area centered on people s attitudes regarding these activities. The interview schedule itself had seven parts beyond the introductory screening material. Part 1 asked about the person s internet use. Part 2 solicited people s views about companies having access to their personal information, profiling them behaviorally, and charging them different prices sometimes to their benefit based on what they learn. In Part 3 the interviewee was given a series of statements about the rules of price discrimination and profiling especially behavioral targeting in the marketplace and asked whether each was true or false. Part 4 involved three short scenarios describing different types of behavioral targeting and soliciting the person s opinions about their ethical acceptability. Part 5 asked people to agree or disagree about statements regarding privacy and personal information. Part 6 asked about the person s everyday privacy-protecting activities and concerns online and offline. And Part 7 requested background data such as age, education, and ethnicity. ICR/International Communication Research of Media, Pennsylvania, carried out the field work for our survey from February 8 to March 14, ICR used a nationally representative RDD (random digit dial) sample to screen households for adults age 18 or older who said that they used the internet in the past month. Using the American Association of Public Opinion Research (AAPOR) RR3 method, a standard for this type of survey, the overall response rate for this study was a very good 58.4%. The telephone interviews, which averaged 20 minutes, were completed with a nationally representative sample of 1,500 adults. The process involved Computer Assisted Telephone Interviewing System (CATI), which ensures that questions follow logical skip patterns and that attitude statements are automatically rotated, eliminating questionposition bias. The resulting data were weighted to population estimates of people who say they used the internet during the past month that were calculated from ICR s large daily rolling cross-sectional study, Centris. 33 The margin of error for reported percentages based on the entire sample of 1,500 is plus or minus 2.51 percentage points at the 95% confidence level. The margin of error is higher for smaller subgroups within the sample. Tables 1 and 2 provide an introductory snapshot of the population we interviewed. As Table 1 indicates, women slightly outnumber men; 73% designate themselves as non- Hispanic white, 8% call themselves non-hispanic blacks; Hispanics (white and black) comprise about 10% of the sample; Asian Americans make up 3%; and Native 13

16 Americans comprise about 1%. About 60% are under age 45, 57% are married, and 44% have children under age 18. Most have at least some higher education, and while a substantial percentage say their household brings in more than $75,000 annually, a firm claim about this population s income distribution is difficult because 17% of the population refused to reveal it. Table 2 indicates that 91% of the respondents have at least one way of connecting to the internet from home. Fully 42% of the respondents say they have been online at home for seven years or more, an indication of the maturing of this medium. Several say they can use more than one method from home, typically dialup and DSL. Three quarters of the respondents go online at least once a day, and about half say they connect several times during the course of the day. When they navigate the internet, 46% call their level of expertise advanced and expert while 54% consider themselves beginner and intermediate. Because this survey centers on the marketplace, we asked the people we phoned basic questions about their offline and online shopping. As Table 2 shows, 81% say they bought something in the supermarket during the past month, while 54% say they bought something online in the past month. Not surprisingly, the supermarket is also more popular than the internet in terms of the number of times people go there to buy. Further analysis shows no significant differences between men and women on this score. Similar percentages of both genders are shoppers both offline and online, and they shop with similar frequency. 14

17 Table 1: Characteristics of U.S. Adults Who Used the Internet In the Past Month ( N=1,500) Sex Male 48 Female 52 Age No answer 2 Race and ethnicity White non-hispanic 73 White Hispanic 9 Black non-hispanic 8 Black Hispanic 1 Asian-American 3 Native American 1 Other 1 No answer 4 Education Less than high school graduate 8 High School/tech school graduate 31 Some College 27 College graduate or more 34 No answer 1 Family Income Less than $40K 26 $40K but less than $75K 29 $75K but less than $100K 13 $100K+ 14 Don t Know/No answer 17 Parental Status Parent of child below age Not parent of child below age No answer 2 %* *When the numbers don t add up to 100% it is because of a rounding error. 15

18 Table 2: Internet activity, internet expertise, and shopping frequency (N=1,500) Online connection(s) at home Dial-up connection only 31 Cable modem with/without dialup 18 DSL with/without dialup 25 Cable or DSL with another method 13 Don t Know 4 No internet connection at home 9 Frequency online from anywhere Several times a day 56 About once a day 20 A few times a week 16 About once a week 5 About once a month 2 Just a few times a year 1 Years online at home One or less 6 Two 4 Three or four 11 Five or six 25 Seven or more 42 Don t know 3 No internet connection at home 9 Self-ranked expertise navigating the internet A beginner 14 Intermediate 40 Advanced 34 Expert 12 How many times bought item online in past month? Once or twice 30 From 3 to 6 times 18 From 7 to 10 times 3 More than 10 times 3 Never 46 How many times bought in supermarket in past month? Once or twice 7 From 3 to 6 26 From 7 to More than 10 times 33 Never 18 *When the numbers don t add up to 100% it is because of a rounding error. %* 16

19 LACKING THE KNOWLEDGE We did find statistically significant differences between the way internet users with certain background characteristics and attitudes performed on the true-false test. Yet our results also showed that even better scorers typically do not have strong basic knowledge of the subject. The statements for the test evolved from a wide-ranging review of academic, trade, and public policy literature as well as discussions with individuals in the Federal Trade Commission and public advocacy organizations. The goal was to generate a series of propositions about what consumers ought to know regarding three topics: who is allowed to control the profiling information about them that can lead to price discrimination, whether the law protects them from secret forms of price discrimination offline and online, and where they can turn for help if they worry that their information is being abused. We created dozens of statements, shared them with colleagues and policy experts, and tested them on college students. We chose the 17 in the survey because they speak to basic, everyday issues involving banks, supermarkets, travel sites, video stores and credit; cover the three topics of control, protection, and help; and offer a balanced attention to both the offline and online marketplace. When taken together to form a knowledge scale, the 17 true-false items demonstrate good internal reliability, as indicated by a Cronbach s Alpha of This means that all of the individual items are statistically associated with one another and thus all appear to be measuring the same underlying concept. By convention, scales that obtain Alpha scores of 0.70 or higher are considered reliable. In introducing this section of the interview, the ICR representative stated that For the next series of statements, please tell me if each one is true or false. If you re not sure, just say, not sure. Table 3 presents the statements, the responses, and the percent that got them wrong. Wrong here means the number who said don t know added to those who gave the incorrect true or false answer. Don t know indicates a willingness to frankly admit ignorance. The proportion of people who said they don t know tends to hover between one between around one-fifth and one-third of the responses. Fairly large percentages of internet-using adults are willing to admit that they don t know these marketplace facts of life. Going down the table from most correct to least correct responses, three themes seem clear: Most internet-using U.S. adults are aware that companies can follow their behavior online. Fully 80% know marketers have the ability to track them across the web, and 62% know that a company can tell if they have opened its without getting their response. Large majorities of internet-using U.S. do not understand key laws and practices relating to profiling, behavioral targeting and price discrimination. About half of the population does know some basics. About 50% recognize that 17

20 most online merchants are allowed to share information with affiliates without the consumers permission; that magazines can sell information about them without permission; and that merchants do not (and need not) allow consumers the opportunity to see or erase the information they gather about them. Moreover, about half seem to have caught the description of phishing and so answer it is false that banks often send their customers s that ask them to click on a link wanting them to verify their account. Yet saying one out of two internet-using adults is aware of these realities means that the other 50% do not understand them. In this connection, the inability of half the respondents to discern phishing is particularly alarming because of the activity s growth. The Gartner consulting firm concluded from April 2004 research that direct losses from identity theft fraud against phishing attack victims including new-account, checking account and credit card account fraud cost U.S. banks and credit card issuers about $1.2 billion in It is also troubling that around 50% of internet-using U.S. adults are unaware that information about them can move between magazines and amid affiliated websites without their approval. A similar percentage thinks they have more control over the information that online firms hold about them than they actually do. A far higher percentage 75% doesn t realize that that the mere presence of a privacy policy is no indication that a site will refrain from sharing visitors information. This pattern of unawareness online and offline may well lead them to be less careful about providing certain sorts of information to merchants than they would be if they knew what actually takes place. Table 2 also shows a lack of knowledge about the legal right of supermarkets, video stores and charities to sell personal information; of banks to share customer information with affiliates; and of retailers to discriminate on price. When it comes to these topics, from 63% to 72% of respondents are wrong. Considering the popularity of online travel sites, one must suspect that many people don t get the best deals when 68% of internetusing adults believe incorrectly that a site such as Expedia or Orbitz that compares prices on different airlines must include the lowest airline prices. It might seem odd that higher proportions of respondents are incorrect about the legality of information-sharing by banks, charities, supermarkets and video stores than by magazines and non-specific websites. Although we have no data to explain the differences, it seems reasonable that that those interviewed used their belief about the sensitivity of the material that the merchants gather as a guide for answering. People may believe that banks and supermarkets hold data about their activities that are more personally revealing than what generic websites and magazines store about them. People may also believe that disclosing the charities that receive their money means divulging particularly sensitive information about lifestyles. Respondents therefore may have concluded that it is illegal for banks, charities and supermarkets but not generic websites and magazines to exchange information. 18

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